Thursday Update

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Includes: FXI, M, SKS, TGT
by: Philip Davis

Gee, it doesn’t take much to deflate sentiment does it?

The futures were way up until the ECB refused to play ball with US and didn’t lower their rates (as I predicted by the way). The BOE, who had a run on one of their banks, lowered rates a quarter point but that’s still 5.5%, miles above our Fed. ECB rates are at 4%, more in-line with our benchmark 4.5%, about a point below the average during the 90s, when the market managed to do quite well without government wealthfare programs.

We don’t have much data today to trade off but jobless claims were down so that’s encouraging. Tomorrow we get the big payroll numbers along with consumer credit but (NYSE:TGT) got us off to a bad retail start this morning but issued a warning: "Our sales results largely met expectations through our two-day post-Thanksgiving event, but softness in the final week of November caused the month overall to fall short of our planned range, said Bob Ulrich, chairman and chief executive officer. This late-month sales shortfall was concentrated in key seasonal categories including toys and holiday trim, but other home and apparel categories fell short of expectations as well. These sales trends would need to meaningfully improve in December in order to achieve fourth quarter EPS growth.” This is worse than Sears missing some numbers, TGT has been a star in the retail space so we have to assume the problem is not their fault.

JWN had a different story as the rich have managed to stay rich, pushing same store sales up a whopping 8.7% and Neiman Marcus reported a 53% rise in Q1 (fiscal) profits which was boosted by the company’s decision to freeze pension benefits, moving even more money from the bottom 99% to the top 1% - yipee! CEO Tansky said "Changes in shopping patterns that could have resulted in less full-price selling were probably tied to "aspirational" customers rather than mainstay customers." Aspirational customers is Newspeak for poor folks who want to buy something special but can’t generally afford to shop there. Last month, Saks (NYSE:SKS) said consumers who shop entry-level price points (aspirationals) have come under pressure in a tough economy, but noted that the upper end of its business had no slowdown.

I’m a Macy’s/Bloomingdales (NYSE:M) guy myself but I get aspirational once in a while, especially around the holidays when I’d rather go into the nice empty Nordstroms and have 3 not-too-busy salespeople come up to me and help me fill out my list in 20 minutes as I check out at a comparatively empty register. Of course that kind of service costs more and it’s worth it for those who can afford it but don’t let your investing self be confused by the success of $8.5Bn a year Nordstroms with a 10% profit margin when $15Bn TGT with a 5% profit margin is having difficulty. We’ve had such a strong middle class in this country since WWII that the rich have forgotten they need those aspirational customers for this economy to work. Neiman Marcus screwing the poor out of their pensions in order to boost their bottom line is a pretty good summary of what’s wrong with this country.

Over in Asia, who used to be poor but have now taken all our good jobs and are doing much better thank you, the Nikkei continued to fly and the Hang Seng weakly gained a point in a knee-jerk reaction to our day so I’m not going to read anything into that. I mentioned yesterday that China said they were going with a tighter economic policy and we have our new "wait 36 hours for the market to catch up to us" rule that means we may want to short the (NYSEARCA:FXI) this morning. Asia also yadda-yadda’d past the OECD report that said "The global economy will slow in 2008 as housing markets cool and credit conditions tighten," focusing instead on " but the U.S. will avoid a recession and the outlook is not that bad." Not that bad! Well, party on Garth!

Like I always say, low expectations are the best expectations!

Well we can’t have any lower expectations than we do for our President and we’ll hear from the Great Communicator at 1:30 re the sub-prime bail-out. No doubt we’ll hear from Paulson as well who has become very good at spinning the mess Bush usually leaves behind whenever he strays off script. Our man Hank is jetting off to China next week to push Beijing to strengthen the Yuan, part of our "strong-dollar" policy I’m sure… As to rallying on the Bush speech, it was Bush himself who said: "Fool me once, shame on — shame on you. Fool me — you can’t get fooled again" and this is the 5th time in 5 sessions that this plan has been "rolled out" so it’s getting a little stale for my tastes.

Following my theme of confession being good for the soul, RBS will take another $2.3Bn in sub-prime write-downs but says that won’t stop them from beating forecasts this year so let’s have a little more respect for the "just do it" bank. US banks could probably weather the storm but why bother when the government is willing to foot the bill? I will reserve judgment until I see the plan but I’m hearing rumors that somehow the "Paulson Plan" (I am now disavowing any relationship to it) has turned into additional Bush wealthfare for the banks as the government hands out more cash and loosens regulations (isn’t that how this whole mess got started?) in order to make sure their campaign funds aren’t unduly impacted by this crisis.

Since the government is being so kind the banks have decided to scale back on the SIV Superfund they were planning - I mean, why help yourselves when you’ve got a politician in your pocket? Meanwhile we are still deep in the woods with student loan defaults, auto loan defaults and all sorts of local credit issues on the rise.

As I said in yesterday’s wrap up (aside from ha-ha oil), we didn’t like this rally enough not to roll up our puts as there is no way we’re going into the holidays uncovered no matter what kind of dance Paulson does today. The underlying fundamentals are still strongly negative so, as I said in yesterday’s morning post, it’s no reason not to have a little fun if the market jumps on the "good news" later. Hey, perhaps we will hear that the Fed may cut rates - that’s always good for a few points too!

Be careful out there!